Imagine your stock dropping 50%

Are you confident that the long term fundamentals can bring your stock back up?

If you say yes, then you probably found a good value.

I've just came up with this test watching my mental stock pick the stock Spreadtrum Communications(SPRD) fall down. I thought the company was great, but it has many risks in a fast sector with lots of competitors. There is no telling if another company could produce baseband chips at a cheaper price or if cell phone manufacturers will stop buying their products. I am not 100% confident in the company, which could be a troubling sign.

Compared to NVIDIA(NVDA), I am completely confident in the long term prospects of the company even if the share price drops to $5. It has significant market power and a single weaker competitor, so I know NVDA will be strong for the long term. The barriers to entry are so great and the costs to switching to another archetecture is too expensive, so I am sure NVIDIA will be strong for the long term. I even recommended this stock to my mom I liked it so lunch, which I wouldn't dare do it with SPRD.

When buying stocks, we often focus on chasing the big gains, and forget about protecting against losses. If you aren't comfortable with the stock going down 50%, you are buying it for the price and not for the value. It might work for a momentum play, but you aren't value investing.